2. The Fed faces a recessionary gap. How would you expect it to respond? Explain step by step how its policy change is likely to affect the economy.3. The Fed decides to take a contractionary policy action. Under what circumstances would this type of policy action be most appropriate? What would you expect to happen to the nominal interest rate, The real interest rate, and the money supply?5. What effect does an open-market purchase of bonds by the Fed have on nominal interest rates? Discuss in terms of
(a) The effect of the purchase on bond prices.
(b) The effect of the purchase on the supply of money.
Problem 1.
1. The Federal Reserve System was created by the Fed Reserve Act, Passed by Congress in 1913, and began operations in 1914. Like all central banks, the Fed is a government agency. Which of the following statements about the Fed is false?
A. The Fed has the power to supervise and regulate banks.
B. the Feds goals are to promote economic growth, maintain low inflation, and watch over a smooth operation of financial markets.
C. the Fed is the Lender of last resort.
D. the Fed is allowed to make a profit like commercial banks.
Chapter 24 Review Questions 1,2,3, and Problems 1,2, and 5
1. What two variables are related by the aggregate demand (AD) curve? Explain why changes in the inflation rate affect the components of planned spending and cause the AD curve to slope downward.
2. State how and why each of the following affects and AD curve:
a. An increase in government purchases.
b. A tax increase.
c. An increase in planned investment spending by firms caused by optimism about the future.
d. A decrease in the Feds inflation target.
3. Discus the relationship between output gaps and inflation. How is this relationship captured in the AS curve?